Exploding Myths: An Empirical and Economic Reassessment of the Rise of Employment At-Will

Like many other types of contracts, employment contracts are frequently incomplete, with important terms missing or unclear. Courts have created a variety of rules to assist in filling these gaps. One of these rules, the employment at-will rule, specifies a default rule which governs in cases where the parties to an employment contract fail to explicitly state the contract\u27s duration. The at-will rule is straightforward, providing that where the term of the contract is indefinite, both the employer and employee are free to terminate the contract without liability at any time. An employee with an at-will contract who is fired has no recourse against her employer, regardless of the employer\u27s reason for firing her. Similarly, employers are unable to sue employees who quit. While courts differ on some secondary issues, such as what evidence is sufficient to overcome the at-will presumption, the rule itself is clear and concise. This simple default rule has produced a surprisingly large amount of literature concerning its historical origins. Not only have there been entire law review articles devoted to explaining its origins, but a subsidiary debate has also arisen over whether the four cases cited in a footnote in support of the rule by an 1877 treatise are on point In addition, many of the modern court opinions and law review articles critical of the at-will rule have offered opinions on the rule\u27s history. This literature does not satisfactorily explain the rule\u27s development. It not only fails to place the at-will rule in its proper historical context, but it also does not explain the rule in terms of the institution which created it: the common law state courts. This failure is due primarily to three mistakes: (1) Not focusing on the institutional nature of the decisionmakers who adopted the at-will rule; (2) narrowly focusing on the at-will rule without consideration of other legal developments; and (3) not considering the interstate variation in adoption of the rule within the United States. As a result of these mistakes, the legal literature has created a set of myths about the rise of employment at-will. The courts\u27 uncritical acceptance of these myths has played a role in the erosion of the rule and the creation of the modem common law of wrongful discharge. This paper takes a new approach to the history of the at-will rule. By exploiting the interstate variation in adoption, I econometrically test some of the explanations for the rule. After showing the inadequacy of the existing theories and the importance of court structure, I present a qualitative analysis that explains the rule as a response of the courts as institutions to the problems of nineteenth century employment law cases. Finally, I briefly examine two issues not addressed by the econometrics: The existence of United States exceptionalism and the interpretation of Wood\u27s treatise